Magnera Corp (MAGN) Q1 2017 Earnings Report, Transcript and Summary

Good morning. My name is Lisa and I will be your conference operator today. At this time, I would like to welcome everyone to the Glatfelter’s First Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] It is now pleasure to turn the call over to John Jacunski. Sir, you may begin.

Thank you, Lisa. Good morning and welcome to Glatfelter’s 2017 first quarter earnings conference call. This is John Jacunski; I’m the company’s CFO. Before we begin our presentation, I have a few standard reminders. During our call this morning, we will use the term adjusted earnings, as well as other non-GAAP financial measures. A reconciliation of these financial measures to our GAAP-based results is included in today’s earnings release and in the investor slides. We will also make forward-looking statements today that are subject to risks and uncertainties. Our 2016 Form 10-K filed with the SEC and today’s release, both of which are available on our website, disclose factors that could cause our actual results to differ materially from these forward-looking statements. These forward-looking statements speak only as of today and we undertake no obligation to update them. And finally, we have made available a slide presentation to accompany our comments on this morning’s call. You may access the slides on our website or through this morning’s webcast provider. I will now turn the call over to Dante Parrini, Glatfelter’s Chairman and Chief Executive Officer.

Thanks John. The year has gotten off to a solid start and we believe we can continue to build on the momentum in our engineered materials businesses coming out of a challenging 2016 environment. Our Composite Fibers business is a core growth platform for Glatfelter and remains instrumental in building market leadership positions in attractive global consumer product categories with healthy long-term prospects. We are cautiously optimistic on the outlook for the wall cover segment and we expect demand for food and beverage products to remain firm with shipment growth expected to continue. When coupled with our cost optimization initiatives, the outlook is promising for profit improvement and margin expansion as the year unfolds. So, let me get back to Slide 3 which also has our earnings for the quarter where we generated adjusted earnings per share of $0.39, which is an increase of 5% over the prior year quarter. Both Composite Fibers and Advanced Airlaid Materials delivered strong results with shipments up in all composite fiber segments and continued growth in wipes and hygiene products at Advanced Airlaid Materials. While challenging market conditions prevailed for specialty papers, its operating performance and cost reduction efforts offset the majority of the volume and price decline impacts. Overall volume, our revenue for the quarter was $391 million, down 1.2% on a constant currency basis, compared to the same quarter last year, while shipments were down 2.4%. As I said Composite Fibers had a strong start to 2017 with shipments up 5% and operating income grew 29%. Following a challenging 2016 demand improved across the board including key market segments like tea, single-serve coffee and wall cover. The Russia and Ukraine wall cover markets are showing signs of stability, and we are pursuing new customer opportunities in Western Europe and Asia. At the same time, cost optimization actions in Australia in the year for this business are gaining traction and contributed to overall EBITDA margin expansion of 220 basis points. In Advanced Airlaid Materials, we had another solid quarter with continued growth in hygiene products and a 7% increase in wipes. Continues improvement in operating performance of both facilities contributed to an 8% increase in operating income and widened EBITDA margins by 110 basis points. We are also on track with our capacity expansion plans in Fort Smith Arkansas, which we expect to come online and during Q4 with commercial shipments beginning in Q1 of 2018. With North America Airlaid demand remaining strong and supply dynamics tight, our strategic decision to bring state-of-the-art capacity to the markets through organic investment remains timely. For Specialty Papers this was a challenging quarter with overall shipments down approximately 4% in-line with the market and operating income lower by 12%. The industry supply demand imbalance has resulted in relatively lower operating rates and is continuing to put pressure on selling prices. Improved operations and cost saving measures, partly offset selling price impact and higher input costs. As we communicated during last quarter's earnings call, we successfully completed the boiler environmental compliance projects and specialty papers in January. With this project now behind us, we expect lower capital expenses for the business unit as we go forward. At an enterprise level, our cash flow generation remains healthy and we expect to return to normalized capital expenditure levels in 2018, upon successful completion of the Airlaid capacity expansion project. And our balance sheet remains in good shape. This concludes my opening remarks, John will now provide a more in-depth review of our first quarter results, then I will offer some closing comments before taking your questions. John?

Thank you, Dante. For the first quarter, we reported net income of $11.6 million or $.26 per share. After excluding non-core business items, we reported adjusted earnings of $17.2 million or $0.39 per share, compared to $0.37 in 2016. Slide 4 shows a bridge of adjusted earnings per share from the first quarter of last year to this year. Deposit fibers results increased earnings per share by $0.06 driven by higher shipping volume and strong operational performance. Advance Airlaid Materials results improved earnings per share by $0.01. Specialty Papers results reduced earnings per share by $0.03, as lower selling prices and higher input costs outpaced improved operations and spending controls. Corporate cost, pension, and interest expense were all in-line with last year. And the effective tax rate on adjusted earnings was 28.1%, compared to 23.9% a year ago, reducing earnings per share by $0.02. This higher tax rate is driven by net operating losses being incurred in the United States, primarily from the Fox River matter and accelerated depreciation on the Specialty Papers environmental compliance project. While we ultimately expect to be able to realize that tax benefit of these NOLs, under the accounting rules we are recorded to set up valuation allowance against the value of the NOLs. As a result, we expect our effective tax rate to be approximately 28% for 2017. The estimated rate is sensitive to the level of income from specialty papers business unit among other items and as a result there could be some volatility in the rate. Slide 5 shows a summary of first quarter results for the Composite Fibers business. Total revenue for this business was $125 million, up 1.3% when compared to the prior year, and up 5.9% on a constant currency basis. Lower selling prices, primarily driven by customer mix and a competitive situation select markets were fully offset by a 5% increase in total shipments. Shipments of our key and single-serve coffee products were up 6%, compared to the year ago quarter. Demand for these products was affected in 2016 by customer inventory management programs. We returned to growth in the first quarter as expected. These markets have solid demand characteristics and we expect shipment growth to continue as we move through 2017. Shipments of wall cover products increased 5% in the first quarter of this year, compared to last year. This market is stabilized with some signs of improvement and we're producing trials for new customer opportunities in Western Europe and Asia. Near-term trends continue to be challenging to predict given the geopolitical and economic uncertainties, and our primary markets for these products, but we are cautiously optimistic. We also saw strong growth in our other product lines during the first quarter, with shipments of composite laminates up 11%, and technical specialties up 6%. Raw material and energy prices were relatively stable in the quarter with the exception of abaca fibers. Tightness and the availability of high quality abaca fiber continues and is putting pressure on prices. Composite Fibers business is operating very well and its largest facility in Gernsbach, Germany delivered record production to meet customer demand in the first quarter. We also made good progress with our cost optimization program we announced earlier this year generating a $1.9 million benefit during the quarter. We continue to expect to generate $10 million for the full-year. When combining the impact of improved operational efficiency and the cost optimization program, operations added $4.1 million to earnings during the quarter. Overall, operating profit increased 29% to $14.4 million with the EBITDA margin expanding 220 basis points. For the second quarter, when compared to the first quarter we expect shipping volumes to increase approximately 5%. We expect selling prices to be in-line with the first quarter, while raw material and energy prices are expected to increase slightly. Advanced Airlaid Materials results are summarized on Slide 6. Total revenue for this business was $60 million, down slightly when compared to the prior year and stable on a constant currency basis. Shipments of wipes continue to grow, up 7% year-over-year, while shipments of hygiene products were up 1.4%. The lower selling prices were driven by customer contract provisions that recorded a pass-through of raw material price changes. As you may recall about 90% of the revenue from this business has this cost pass-through arrangement. Operations for the Airlaid business continue to perform very well, which is key to growth in 2017 as we bridge our customers to greater capacity in 2018 with the opening of Fort Smith. This business seen is off to a great start in 2017 with operating profit up 8% to $7.1 million and 110 basis points increase in EBITDA margins. For the second quarter, we expect shipping volumes to be slightly higher compared to the first quarter, and we expect average selling prices and raw material and energy prices to be in line with the first quarter. Slide 7 provides a summary of the results for Specialty Papers. Revenue for Specialty Papers was $205.8 million or 5.6% lower than the prior year quarter. Shipments decreased 4.2%, which was in-line with a broader uncoated freesheet market. Shipments of engineered products were up 6%, driven by increased shipments of inkjet and other specialized products, where shipments declined in each of other market segments reflecting the broader market declining. Selling prices in the first quarter were below the year ago levels and in all product categories, reflecting continued pricing pressure as a result of the excess capacity and lower industry operating rates. We did announce a 6% price increase for governance products during the quarter that we expect will offset some of the price weakness on other products. Raw material prices were relatively stable although there has been an uptick in pulp prices in the broader market and natural gas prices were higher in the first quarter of this year, compared to last year. Operating performance at our facilities where little strong with good pulp mill and paper machine performance and spending was tightly controlled. Overall, operating income declined $1.7 million to $13.2 million when compared to the year ago quarter. For the second quarter, we expect shipping volumes to be slightly lower than the first quarter with selling prices declining slightly. Raw material and energy prices are expected to be slightly higher. We anticipate taking machine downtime to align production rates with demand and manage inventory levels impacting operating income by approximately $3 million during the quarter. We will also complete our annual maintenance outages during the second quarter with an expected impact operating profit of approximately $22 million to $24 million, compared to $26.3 million last year. Slide 8 shows corporate costs and other financial items. During the first quarter, we incurred costs related to the Specialty Papers’ environmental compliance project, the Airlaid capacity expansion, and the Composite Fibers cost optimization program that were excluded from adjusted earnings. Corporate costs during the first quarter were $5.3 million, and were in-line with prior year. We expect corporate cost in the second quarter to be on a similar level. Slide 9 shows our free cash flow. During the first quarter, cash flow from operations was $7.6 million, slightly lower than last year. The first quarter includes normal seasonal working capital use. Total capital expenditures were lower this year, reflecting lower spending on our major capital programs. Slide 10 provides estimates for capital expenditures and related cost. The Boiler environmental compliance project was completed in the first quarter. The Airlaid capacity expansion project, and the one-time implementation cost remain on target with commercial shipments to begin in the first quarter of 2018. Consistent with our prior guidance for the full-year 2017, we expect capital expenditures to fall between $125 million and $140 million. Slide 11 shows some balance sheet and liquidity metrics. Our net debt on March 31 total $353 million, up $35 million from the end of 2016. We finished the quarter with $57 million of cash and $151 million available under our revolving credit facility. Our balance sheet remains in good shape with leverage based on adjusted EBITDA and on a net debt basis of 2.2 times. This concludes my comments. I will turn the call back to Dante.

Thank you, John. Our Q1 results really reflect a positive start to the year. We are in line with our expectations going into the quarter. As we turn our focus to quarter two and the rest of 2017, our Advanced Airlaid Materials business continues to build on its leading market positions in hygiene and specialty wipes. We expect these segments to continue their 3% to 4% growth rates and the capacity expansion project for the North American market will be a catalyst to meaningfully improve the growth trajectory and margin profile of this business. As stated earlier, Composite Fibers return to growth after a year of inventory adjustments and slightly more challenging market environment, it gives us optimism as we think about this important growth platform for the company. And the combination of the expected growth across our market segments and the benefits of our cost optimization initiatives all look very good as we think about Q2 and the remainder of 2017. And in Specialty Papers in-light of the challenging market conditions we will focus our efforts on new business and new product development by leveraging our engineered product platform, while aggressively managing costs to preserve the cash flow profile of this business. With the environmental compliance project now fully complete, capital spending will return to normalized levels. Before I open the call for questions, I’m pleased to acknowledge that Glatfelter was the recipient of two distinct distinguished awards last month, one in the area of product innovation and the other in recognition of overall supply excellence. The innovation award was announced at index 2017, the world's leading nonwovens exhibition held in Geneva, Switzerland for our Dreamweaver Gold product line, which is a new generation engineered materials designed for applications and separators for lithium ion batteries and capacitors. Dreamweaver Gold is a product developed by technology company Dreamweaver International in corporation with Glatfelter. And the supplier recognition award was from one of our largest customers Keurig Green Mountain, who named Glatfelter supplier of the year. This is the highest honor among Keurig 16 annual supplier recognition awards, which were announced during its top 100 supplier conference in Burlington, Massachusetts last month. These awards demonstrate our ongoing commitment to customer service excellence, innovation, and technology leadership and high-value engineered materials. I’d like to recognize the hard work and dedication of our Composite Fibers team members who helped us earn these prestigious distinctions. These are just a couple of examples of Glatfelter's tireless efforts to be the supplier of choice of engineered materials to customers around the world. I’ll now open the call for your questions.

[Operator Instructions] And your first question comes from Mark Wilde with BMO Capital Management.

Hi Dante, hi John.

Good morning Mark.

I wondered Dante just to start off on the Specialty Paper business, is it possible for you to kind of quantify the amount of downtime or the downtime cost in both the first quarter and then what you're expecting in the second quarter?

Sure. I think John has that data available.

Sure Mark. In the first quarter we took actually very little downtime, just a few machine days at the start of the year after the Christmas and New Year Holiday. In the second quarter, we expect to take around 12,000 tons of market-related downtime and we expect the impact of that to be about $3 million, generally just the fixed cost impact of idling the machine, of course that can be sensitive to the demand in the market. We drove some elevated inventories after exiting Q1, so this is in part to help work down some of those inventories and then also match production with incoming demand.

Okay. And then, is it possible John in the guidance you kind of, you pointed kind of three things that are all drags of some order kind of prices being downloaded a bit, costing up a little bit, volume being a little bit weaker sequentially, I'm just trying to figure out how all that and that’s against the sort of 3, 3.5 million drop year-on-year in maintenance expense?

Yes, I think Mark I don't really want to quantify it too much, I mean I think we’ve, the drops are slight prices, in the first quarter we’re generally flat to Q4, which is coming down slightly, so I think the sort of discussions gave hopefully you can get too in the right ballpark, but we don't expect real significant movements in any of the input cost or selling prices.

Okay, alright that’s helpful. And then just, if the market remains weak, would you look at some kind of a longer term kind of supply cuts rather than just market downtime?

Sure Mark, I mean as always, we monitor and match our demand with the internal capacity and as John just summarized for you, we take downtime or reduce shifts when necessary. I think we do have a bit of a diverse mix, which helps us keep our assets full more frequently through the course of an entire business cycle. We do, our analytics and we're going to make the decisions that are necessary to preserve the cash flow profile of that business and have a competitive cost structure and match up our assumptions about the future for this particular business unit. We did close a small machine in December 2016 in Spring Grove. It wasn't large, but just under 10,000 tons a year of capacity. So it’s something that we actively monitor and have a plan in place depending on how we see the industry demand and supply reconcile itself over time.

Yes, I didn't know Dante that either of the mills whether it is possible to take out any more capacity without really distorting the economics for either of those Mills?

Well it depends on the circumstance right. So, it depends on where we see market pricing and utilization and how the mix is shaping up. So, I think it is very situational, I think that’s the best answer I can provide you at this point.

Okay. I think that’s fair. Can we turn now to the Composite Fibers and I wondered if you could talk a little bit about first what you're seeing in the wall covering area and then maybe give us a little more color on some of these new business initiatives, you said in Western Europe and Asia to try to build a little broader geographic base for the wall covering business?

Sure. So, as I stated we see the market as more stable than it has been in recent quarters. We are encouraged by the first quarter growth of about 5% year-over-year. I think if you look at some of the contextual data it’s also constructive, especially for the Russia Ukraine region where in Russia there is an expectation that we see GDP growth of about 1.3% this year coming off a couple of years of recessionary environment. If you look at the ruble it’s strengthened against the euro of about 25% Q1 2017 versus Q1 2016, a Scandinavian competitor exited the market in 2016, which is creating some opportunity to replace them as a supplier of course certain wall cover grades. And then I would say the broader opportunities that we see whether that’s in Europe or Asia that we have been working over several months and quarters on business development to try to round out and expand the portfolio of customers we have for this particular product line and so I would say the combined effects of those have us cautiously optimistic, you know the ongoing caveat is that when you have geopolitical profile of a region like Russia, Ukraine it does make forecasting a bit more challenging and can lend itself to a little bit more uncertainty.

So, yes, that is for sure. And what do you expect Dante this year in terms of just food and beverage growth?

Let's say that we expect to grow with the market at least.

And that would be 3 to 5, 3 to 4?

Yes I would say 3 to 4 is the good estimation of market growth for those product categories.

Okay and the last one I had, just turning to Airlaid, you know you called out the impact of the of Fort Smith start up not only on your volume trajectory, but you mentioned margins, and margins in this business are actually quite good relative to what they were when you bought the business about sort of six or seven years ago, how much further can Fort Smith help you expand those margins?

So, good question and we are very enthusiastic about the contributions that Fort Smith will have for Glatfelter in the Airlaid business more specifically. It is going to add additional scale to the business; it will help us further diversify our technology and product offering. We don't have to add a lot of fixed cost to support Fort Smith coming online. So the incremental EBITDA that comes from Fort Smith will be at a margin profile that’s attractive and should [indiscernible] the entire business unit. Given the nature of the asset, the types of products and customers that we’re serving, I would rather not get into very specific details about the profit profile or the products that are going to be produced at Fort Smith, but I will say that I think it’s stacking up to be a compelling investment and will help us take the Airlaid business to that next level of performance.

And Dante, if for some reason at some point you added a second line or even a third line at Fort Smith that would be incrementally even more positive to margins in that business?

Yes we have the footprints in Fort Smith to be able to add and grow over time and again it will depend on the circumstances but generally speaking I would envision that we would not have to add much along the lines of overhead to support another line of production offset in Fort Smith.

And what would you think your trend of growth would be in Airlaid over the next 3 to 5 years just from a volume perspective?

Well if you look at our track record since we bought the business, we’ve grown our volume at a CAGR of around 5% per year. If you look at the - a lot of the different nonwoven categories, you know they are growing in the 3% to 6% per year range, so I guess it would depend on how the mix unfolds, but we expect as leaders in this space to be able to grow at least with market.

Okay that's great. I’ll turn it over and come back for a couple of follow-ups.

Thanks.

And your next question comes from Dan Jacome with Sidoti.

Good morning, how are you?

Hi Dan.

Hi. So let's just stay clear to the Advanced Airlaid with the capacity as coming online, just curious how you're thinking about just the mix and where you want to skew in personal hygiene and versus the wipes, I would say the wipes still pretty solid growth here, I think 7%, that was my first question?

Sure, so Fort Smith capacity will be directed toward specialty wipes market as a primary market and so that’s where we expect the majority of the volume and growth to come from in Fort Smith. And a gain those markets are growing, if you want to round about 4% to 5% per year.

Okay, great. And then just turning over to cost, the fiber for the abaca uphold, I know what the answer is, I just want to hear to you, your version kind of why is it tight, is it the same thing that was driving the tightness. I think a year ago you had the same call out and maybe it is part of it. The trend is in the beverage industry, some of those abaca folks or whatever pretty sustainable, however kind of known for their sustainability, is that what it is and why is the market tight?

Sure. So there are a few different factors that can influence the abaca market. Those fibers are predominantly grown in the Philippines and parts of Latin America. And so in the Philippines weather can have an effect, these are not large industrial plantations, but they are much smaller farmers and smaller tracts of land across all parts of the Philippines. So, as typhoon season comes through that will have an impact. I do believe that there is a leaning toward more sustainable natural fibers in general, but in terms of Glatfelter we are the largest buyer of raw fiber in the region and so due to that purview we have made improvements in our sourcing strategies and have opened new challenge for abaca. We continue to optimize our recipes to either streamline and reduce the amount of abaca content without compromising product performance at all or using other natural fibers and we also have from a contingency point-of-view non-abaca recipes developed from many of our grades. So, we have a variety of business continuity plans in place, so that we can give our customers in the market supreme confidence that they can rely on Glatfelter regardless of these weather cycles and what else maybe going on in the region. And then finally we do help manage risk through investments and raw materials, wipe and finished goods. This is at our facility in the Philippines, as well as finished goods on ocean liners and on the ground at our Europe-based mills.

Okay great. That’s really a lot of color there. I appreciate it. And then I just had a question, I think you mentioned a competitor exited a market, where was is it, is that wall cover?

Yes, so that was a Scandinavian French player that decided to shut a machine down that was producing a combination of wall cover products both nonwovens and paper-based wall cover and decided to rebuild the machine to support growth in their core markets and so that creates an opportunity for us to engage their customers and see if we can bring on some new business especially as a leader in that space and the largest player in Europe.

Okay that was in my question, why where they exiting, but it is not really a cause of concern it’s just, the wall cover was in their core competency and so for you guys it’s the benefit I guess?

Correct. It was a very small part of their business.

Got it. Okay, great. Thanks a lot.

Your next question comes from Debbie Jones with Deutsche Bank.

Hi good morning. Thank you for all the updates. My first question is just on advanced Airlaid, just kind of a point of clarification you called out wipes and hygiene products being up 7% and 1.4% respectively, total volumes up just 1.2%, is there a product mix shift or is there a category there that’s kind of in decline for you and how should we think about that going forward?

Wouldn’t describe any of the categories as in decline, clearly wipes is a growing segment and that we are investing in our capacity in Fort Smith and so we have a lot of effort underway to help bridge our customers through 2017 to get them to 2018 when the additional capacity will be available. The overall hygiene category did grow and the different subcategories of hygiene had different levels of growth rates. I would say that Europe does remain a bit sluggish and so that has pulled down the more historical growth level that we have seen in some high and it is having a bit of a weighted average impact on the overall growth for that hygiene category, but we had a very strong quarter for adult and continents. Seasonally our baby swim diaper business is up substantially on a year-over-your basis albeit on smaller volume, but nonetheless that is encouraging, so that is the way I would address your question.

Okay, and then question on Composite Fibers you provide a lot of color there, but just if I look at your guidance the sequential move for shipments would imply that you are flat year-over-year, can you correct me if I’m wrong there and then just how to think about that, because I think it was pretty encouraging to see that you had, you kind of shifted to growth in Q1, so can you comment on the outlook there on a year-over-year basis and then second question, how should I think about the seasonality for this business in general, just because if I look historically I’m not sure if that’s the best representative answer there?

So Debbie I think certainly we would expect some volume growth in Q2 year-over-year, our guidance was up approximately 5%, so we do expect a little bit of volume growth given the - some of the uncertainties continuing to surround the wall cover business as we said we are cautiously optimistic, but we have not embedded a significant amount of growth in our overall estimate. So we expect to have some shipment growth in Q2.

Okay, that’s helpful.

Yes, on a sequential quarter basis it will be up 5% and modestly over Q2 and some of the caveats that John said, we want to still be a bit conservative in terms of how we forecast the wall cover business for CFPU.

Yes, so that is why I was just trying to understand the seasonality there, I mean, for example Q1 to Q2 last year, I think you had like a 10% sequentially move, so just a little confusing to me because I don't think last year is really representative of the true seasonality, especially when you want to get your sense on that going forward?

Yes that’s right. I mean Q1 last year was a particularly weak period and we had talked about some of the inventory management programs that some of our customers had, so definitely Q1 of last year was a little bit on the weaker side. So 10% is a little bit, too big of an expectation I think as a normal seasonal trade.

Okay. And my takeaway here is that you might do a little bit better in Q2, but then you are just trying to remain conservative.

I think that’s a fair summary. And I would say the Composite Fibers business has a little bit less seasonality through the course of the year generally speaking then our North American Specialty Papers business.

Okay, all right thanks, that's helpful. And then I wonder, can we just go back and kind of review what specifically you are doing to kind of cut cost in the specialty fibers business and how much more room there is to go?

You are referring to Composite Fibers?

Well, I think that you also had a decent amount of savings in papers as well, but correct me if I am wrong if that was something different.

Yes, so you are correct. So the cost improvement program that we announced for Composite Fibers is the one that has 10 million economic benefit projected for 2017, and as we exit 2017 and into 2018 we estimate about 13 million run rate. And we are off to a good start in the first quarter, so out of the gates quickly which is good and not changing any of the guidance on the expectations for the cost savings and Composite Fibers this year. And Specialty Papers given the nature of that business, we have an ongoing and very active and aggressive series of continuous improvement and cost reduction initiatives. It is necessary given some of the secular headwinds that we face and especially with the backdrop of weaker operating rates and its effect on price and volume. So, we are accelerating and intensifying our efforts in that regard and we are working very diligently to try to stay off the headwinds that we covered and that we expect to continue to see until industry operating rates and supply and demand balance themselves a little bit better.

Okay great and then just two quick ones here. I just noticed in your deck and that you took up the major product cost for 2017, just from $6 million to $11 million could you comment on that one? And then two, final question just on the M&A pipeline for Glatfelter?

On the major project cost that we outlined on Slide 10, really the difference between what we have previously disclosed and this relates to the tax situation I described at the start of the call, where we had previously been applying a tax rate against that. Given the situation we are in with meeting evaluation allowance against U.S.-based NOLs. We have reduced the tax rate to 0. So the gross spending on these items - pre-tax spending on these items has not only changed it is driven by a change in the tax rate that’s being applied.

Okay, thanks and then the M&A pipeline.

Sure. Acquisitions remain an important part of our strategy as we think about further accelerating Glatfelter’s growth and continuing to build on our engineered materials platform. As you know, we are exiting a couple of year period of heavy capital spending whether it was the boiler conversions for environmental compliance at our US mills and building of a Greenfield facility in Arkansas for the Airlaid business. The capital project for environmental compliance is complete and we will bring up Fort Smith in Q4 of this year. So those heavy spending programs will run their course and wind down at the end of this year. Fort Smith could have a little bit of cash to spill over in Q1 next year, but it won't be anywhere near as material as last couple of years have been. At the same time, we were being mindful although confident in our position with the Fox River, we also had to be thoughtful about getting clarity on what our cost expectations would be as we think about going forward, and the completion of the remediation of the Fox River. So as we gain more clarity around these points and as we wind down these major capital programs and expect a substantial list in the cash flow profile of the business and at the same time we have been managing the balance sheet aggressively. So, our leverage is 2.2 times or so. We have capacity and we have an interest in building on to our engineered materials platform. So, it is an active part and an ongoing part of our strategy. And we will apprise you of progress in details when it is the right time.

Okay great. Thanks. I’ll turn it over.

[Operator Instructions] Your next question comes from Steve Chercover with D. A. Davidson.

Thanks, good morning everyone.

Good morning Steve.

Kind of late in the Q&A, but I did have a couple of questions first of all on Airlaid is modeling, can you tell us how much EBITDA and depreciation you expect in 2018, I don't know if you ever disclose that.

Steve, we don't provide those types of estimates.

How about maybe the payback period on that investment?

What we said is we think the payback will be well above our cost of equity. We expect that the ramp up period for the full utilization capacity will be 2 years to 3 years and as Dante had described earlier, we expect that the margins - the incremental margins from this facility will be well above our current average EBITDA margins and we don't have to add a lot of overhead when we bring this facility up.

Okay. So and it becomes commercial in Q1 2018, should we foresee any significant start-up expenses that should be incorporated into the Q4 projection?

So, we are just referring in the last question, or two questions go around Slide 10 in our investor deck. So, we’ve outlined what we expect the one-time cost to be, and we have been, we started to incur those as we have been hiring people and training people and implementing systems and that kind of thing. So, we’ve been carving those out of our normal earnings as a one-time project cost. So they are excluded from adjusted earnings, but we do have the guidance again on Slide 10 of our quarterly investor deck, and I’m happy to follow up and get into more of the details with you, if you like it.

All right, well forgive me for that. And then the downtime in paper, maybe just seen this moment on my part, but I don't really recall you guys having much in the way of economic downtime until recently. So, is that the case first of all?

We've had, over the years we've had downtime depending on market conditions. I would say that more often than not that we were certainly running at capacity. We had some downtime in our Q4 last year and as we’ve described, the market is not particularly strong right now and our capacity utilization rates are on the lower side, so that just makes for a much more competitive market, and our volumes in Q1 were down in line with the broader market. So that’s - it is just reflecting that situation in the market.

Yes I mean I believe you’ve typically outperformed the broader market. So, are there any grade that you had point to within this specialties that are kind of tailing off?

Well in the tailing off part, I think there is no new news on the part of the portfolio where you have exposure to US printing and writing rates. The areas that we have been leveraging like our engineered products portfolio, high-speed ink jet that was up 10% year-over-year in Q1. We make a number of customized products that are a little bit on the one off side, you know that had double-digit growth year-over-year and so it’s more a factor of the market conditions that John made reference to. We've also invested a lot of energy and effort in our operational excellence and continuous improvement and the operating metrics of the pulp mills and the paper machines have also improved over this time. So, we are generating incremental capacity by virtue of our uptime efficiency that our overall manufacturing productivity that are scheduling and sequencing of grades, and so I think that’s also a factor that we take into consideration when matching up our production capacity with the projected demand.

Got it. Okay, thank you both.

You have a follow-up from Mark Wilde.

Yes just a few kind of small ones. Dante in the Composite Fibers business, I think in the slide deck you show little over $4 million of operational improvement in Composite Fibers, and I think the portion of that that’s tied to your kind past optimization program is only about 1.9 million. So what are the other sort of pieces in there, and are there going to be re-occurring to any extent through the course of this year.

Yes Mark. We have talked in the past about our continuous improvement initiatives that we have in our methodology that’s aimed at improving productivity and lowering waster levels. I think I mentioned in my comments we had record production out of our Gernsbach, Germany facility. We also, I believe had record production out of our facility in France. So the initiatives that we have been undertaking to improve productivity has allowed us to lower our overall cost structure. We definitely believe that that’s sustainable, the $10 million cost reduction programs that we’ve also talked about we believe that’s sustainable. So, I think this business has done a very good job over time of continuing to improve the efficiency and cost structure of the business. It certainly helps when you have a little bit of additional volume to be able to obtain the benefit of improved productivity and so we saw a little bit of that in the first quarter as well, but we certainly believe it’s sustainable.

Okay. All right. And then also in Composite Fibers for the second quarter, you mentioned increased volume, but also increased raw material cost. So, can you help us think about how those two things kind of play against each other?

I think the raw material cost, we expect to be up slightly, really driven by pulp prices, so this business purchases, the only - it makes us [indiscernible] pulp primarily, but it purchases all these other pulps and the market prices there have gone up a little bit. And so we expect as we look at the overall raw materials and we just expect a slight increase, but then it’s driven by wood pulp, certainly the 5% improvement in volume you can see the impact from Q1 where we had a similar increase year-over-year. So, the volume impacts should be more favorable certainly than the increase in raw material cost.

Okay, that’s helpful. And then John can you just finally, can you just help us sort of on a quarter-to-quarter basis, kind of cadence the CapEx, because basically in the first quarter, you're running at kind of what it looks like is kind of a normal kind of full-year number for this year, you ran a little over 30, I think you are saying the number for the year is 125 to 140, when do we start to see that number really come down on just a quarter-by-quarter basis?

We have just taken down a little bit of Q1 as we finished Specialty Papers. I apologize I did not have the quarterly breakdown in front of you, but I’m happy to follow-up with you and give you a better sense for how the normal CapEx will flow for the last three quarters, as well as the Airlaid expansion.

Okay and it’s fair to say in 2018 and 2019, if we pencil in something in the range of $70 million to $80 million out of a good kind of first swing estimated CapEx in the 12 [ph] years?

Yes, that is that guidance. We expect it to get back to our normal CapEx range in 2018.

Okay, all right. It sounds good. Good luck in the quarter and the rest of the year guys.

Thank you.

And it appears we have no more questions in the queue at this time. Dante, do you have any closing remarks.

Sure Lisa. Just want to thank everyone for joining our call today and we look forward to speaking with you next quarter. Have a good day.